Whilst every business is different and each will have a more specific set of criteria to measure performance and success, there are a few key things to look at in order to gain an overall view of where your business stands. This information can then be utilised to create benchmarks and goals into the future. Furthermore, will aid in identifying strengths and weaknesses in your business in order to prepare for foreseeable circumstances such as the win or loss of a large client or key employee.
Here are a few examples of what you should be monitoring to ensure you have your bases covered when it comes to identifying opportunities and avoiding threats to achieve optimal results for your business.
Gross Profit Margin
This is a key metric which shows the profitability of your business. It compares the remaining profit to total sales after deducting the the variable costs incurred in making those sales.
It is a relatively simple calculation and a good starting point when working toward achieving a healthy net profit. It also provides visibility, enabling you to strategise where the sweet spot is in relation to price point vs number of sales so that you can achieve the perfect balance.
Net Profit Margin
Your net profit margin shows you how much profit you are making as a percentage of total sales after all costs, both fixed and variable, are deducted.
Through tracking increases and decreases here, you are able to assess whether current business operations are working effectively as well as forecast future profits based on the amount of revenue. If you run multiple businesses, as this measure is a percentage or decimal value, you are able to directly compare the performance of each entity regardless of size.
Sales Growth over relevant timeframe
Ambitious companies are likely to focus on driving sales. This is positive in that it generates a mentality towards continuous development and improvement. However it is important to bear in mind the requirements necessary to prepare you for this growth and the ability to sustain it, such as the funding, headcount and working capital available.
Customer retention
Customer retention is a great indicator to review when forecasting as well as a brilliant gauge of customer satisfaction. If there is a drop off here then you will need to identify and rectify promptly as your profit may start to follow the same trend.
Customer growth (number of customers)
In order for your business and profits to grow, it naturally requires more customers. Customer growth rate can create more transparency around how your overall business is tracking. A slow down here will inherently lead to a fall in the trajectory of your profits.
Employee turnover
Having an enthusiastic motivated workforce is a huge driver of success. Both employees and clients alike feel more confident when there is stability here. Long term employees can be an invaluable asset to your business as they develop an intricate knowledge of the inner machinations of their role, the business and a strong rapport with clients. If you are having trouble retaining staff it is vital that you address the cause and work towards a solution.
Benchmarking against industry
Better the devil you know. It is always sensible to have an awareness of who your competitors are and how you compare in the market. What are they doing better and how are they doing it, how can this then be applied to alter your strategies and give you the competitive advantage. Equally, it is ideal to have positive relationships within your industry and explore possibilities for collaboration or referral as it is likely that there will be differentiation between services or products and you may well find an opportunity in those that complement one another.
Working capital utilisation
Good management of working capital is vital for the financial well being of your business. The goal here is to manage your working capital in such a way that you strike a solid balance between growth, profitability and liquidity, hence maximising operational efficiency. This includes inventory management, as well as accounts receivable and accounts payable. If all is under control here, it is more likely that all operations of the business will run smoothly and ultimately increase profitability as well.
Inventory turnover
The speed at which your business moves stock is a critical factor in business performance Generally, a low turnover indicates weak sales and overstocking which leads to increased holding costs. This can be caused by issues with product or insufficient, ineffective marketing. Conversely, a high turnover could be the result of strong sales which is fantastic, or too little stock, which can lead to lost business. Ultimately all of these factors can be managed in such a way that you are achieving the best results for your company thus it is extremely important to be aware of your inventory turnover.
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The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.